Last week, it was reported that Bittrex was the target of an enforcement action emanating from the US Department of Treasury. Two divisions at Treasury, the Office of Foreign Assets Control (OFAC) and The Financial Crimes Enforcement Network (FinCEN) announced enforcement actions. The crypto trading platform was fined and agreed to pay a net amount of $29.3 million for violations of the Bank Secrecy Act’s (BSA) anti-money laundering (AML) program and suspicious activity report (SAR) requirements. The actual penalty was $53 Million, but Treasury provided credit for the FinCEN penalty of $24 million.
Washington state-based Bittrex is currently ranked as the 26th largest crypto exchange in the world. The Department of Treasury proudly noted this was the largest enforcement action targeting a crypto exchange to date by OFAC and the first time that OFAC and FinCEN had coordinated enforcement actions.
At the time the settlement was revealed, OFAC Director Andrea Gacki said that when “virtual currency firms” fail to implement sanctions, they can become vehicles for “illicit actors” that undermine national security.
“Virtual currency exchanges operating worldwide should understand both who – and where – their customers are,” said Gacki, adding that OFAC will continue to hold accountable virtual currency firms that fail to implement appropriate controls, leading to sanction violations. This statement by the Director obviously leads to the next question: will more crypto exchanges receive the same or similar treatment?
It is widely understood within the crypto-sphere that many crypto-trading platforms operated with limited controls in the early days of digital asset trading. Crypto exchanges remain the one sector of digital assets that has performed well financially. As the crypto sector grew, digital marketplaces rapidly launched to fill the demand for crypto speculation. Many platforms operated globally as regulations were non-existent or simply not enforced – as regulators struggled to adapt to the fast growing crypto market. Over time, these operations realized that unless they adhered to stricter KYC or know-your-customer protocols, along with AML defenses, they were setting themselves up for civil lawsuits, and, perhaps, allegations of criminal activity.
The OFAC enforcement action claimed that Bittrex failed to prevent persons “apparently located” in the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria from using its platform to engage in approximately $263 million worth of crypto transactions between March 2014 and December 2017.
FinCEN claimed that Bittrex failed to maintain an AML program from February 2014 through December 2018 and failed to file SARs for three years.
Both these allegations are from years ago, during the wild west trading days of initial coin offerings (ICO), but Bittrex was not alone in its shortcomings in regard to AML/KYC compliance during the early days of crypto trading.
After Treasury announced the action against Bittrex, CI touched base with Jaimie L. Nawaday, an attorney who recently joined Seward & Kissel LLP. Before moving over to big law, Nawaday was a federal prosecutor in the Southern District of New York (SDNY), where she served as an Assistant U.S. Attorney in both the Criminal and Civil Divisions. During her seven-year tenure at SDNY, she led multiple fraud and money laundering trials. Now a partner at Seward & Kissel in the Litigation Department, she is an expert on BSA and AML issues.
We asked Nawaday if the penalty levied on Bittrex was just a slap on the wrist, as many of these crypto exchanges have generated millions of dollars in profits.
Nawaday noted that it’s OFAC’s largest cryptocurrency settlement to date, sending a signal to the market that the numbers will likely get larger and larger, especially in parallel enforcement actions with FinCEN.
Asked if Treasury was cherry-picking targets as the conventional wisdom is that most crypto exchanges had poor compliance practices in the beginning of crypto trading, and if OFAC/FinCEN will pursue others, Nawaday was skeptical there would be many crypto exchanges due to the time involved in prosecuting these cases.
“Law enforcement has limited resources, so it always has to be selective in terms of targets. Law enforcement often pursues larger targets because such cases generate more press and potentially provide greater deterrence to others in the industry,” Nawaday stated.
And what about crypto exchanges based outside the U.S. but offering services to US-based individuals?
“As the BitMEX case made clear, if you’re serving US-based individuals, you need to comply with U.S. sanctions and anti-money laundering requirements.”
The US Department of Justice went after BitMEX, ostensibly based in Seychelles, for a “willful failure to implement AML and KYC programs,” labeling the crypto derivative trading marketplace “a money-laundering platform.” Eventually, the founders settled with the Feds, and now BitMEX is a compliant operation but does not provide services to US customers.
So there will probably be more enforcement actions on the way, with government officials mostly pursuing high-profile names.
Today, US crypto platforms typically adhere to state-based money transmitter rules, something the Securities and Exchange Commission (SEC) has challenged – adding another twist to the saga. Not too long ago, Coinbase was broad-sided by the SEC, which claimed in an enforcement action that Coinbase was trading securities and thus needed to register with the Commission. One way or another, crypto trading platforms will eventually fall under federal oversight, probably after new Congressional legislation becomes law. Established crypto trading platforms will always need to comply with AML/KYC requirements, and some bigger platforms may get disciplined for allegations of transgressions years in the past, mirroring Bittrex, by paying a fine and moving on with their business.